The former approach is a more centralized/controlled way of adding images and it dictates that the image file being added adhere to a certain given format (e.g. in order to point to the Bob Jones image when opening the Bob Jones form, I need to ensure that I have a "BobJones.gif" file on the server or perhaps "bjones_abc.com.gif" or some other derivation from the contact record so that I can link to the file when the form loads). Therefore adding images using this approach would presumably be given to an administrator user rather than being "democratized".
The other approach is to utilize the SilverLight control that can be found in codeplex. Kudos is also obviously due to the creator of this little add on.
Using this utility, any user can add an image to the contact form and the image is simply stored as an image in the Notes of the contact. A more decentralized approach and indeed a very slick alternative!